Economists Versus Physics

I’m not sure what it is about economics that makes both its adherents and its detractors feel the need to make constant analogies to other sciences, particularly physics, to try to justify their preferred approach. Unfortunately, this problem isn’t just a blogosphere phenomenon; it appears in every area of the field, from blogs to articles to widely read economics textbooks.

For example, not too infrequently I will see a comment on heterodox work along the lines of “Newton’s theories were debunked by Einstein but they are still taught!!!!” Being untrained in physics (past high school) myself, I am grateful to have commenters who know their stuff, and can sweep aside such silly statements. In the case of this particular argument, the fact is that when studying everyday objects, the difference between Newton’s laws, quantum mechanics and general relativity is so demonstrably, empirically tiny that they effectively give the same results.

So even though quantum mechanics teaches us that in order to measure the position of a particle you must change its momentum, and that in order to measure its momentum you must change its position, the size of these ‘changes’ on every day objects is practically immeasurable. Similarly, even though relativity teaches us that the relative speed of objects is ‘constrained’ by the universal constant, the effect on everyday velocities is too small to matter. Economists are simply unable to claim anything close to this level of precision or empirical corroboration, and perhaps they never will be, due the fact that they cannot engage in controlled experiments.

If you ask an astronomer how far a particular star is from our sun, he’ll give you a number, but it won’t be accurate. Man’s ability to measure astronomical distances is still limited. An astronomer might well take better measurements and conclude that a star is really twice or half as far away as he previously thought.

Mankiw’s suggestion astronomers have this little clue what they are doing is misleading. We are talking about people who can calculate the existence of a planet close to a distant star, based on the (relatively) tiny ‘wobble’ of said star. Astronomers have many different methods for calculating stellar distances: parallax, red shift, luminosity; and these methods can be used and cross-checked against one another. As you will see from the parallax link, there are also in-built, estimable errors in their calculations, which can help them straying too far off the mark.

While it is true that at large distances, luminosity can be hard to interpret (a star may be close and dim, or bright and far away) Mankiw is mostly wrong. Astronomers still make many, largely accurate predictions, while economist’s predictions are at best contested and uncertain, or worse, incorrect. The very worst models are unfalsifiable, such as the NAIRU Mankiw is defending, which seems to move around so much that it is meaningless.

In the physical world, there is ‘no such thing’ as a frictionless plane or a perfect vacuum.

Perhaps not, but all these assumptions do is eliminate a known mathematical variable. This is not the same as positing an imaginary substance (utility) just so that mathematics can be used; or assuming that decision makers obey axioms which have been shown to be falsetime and time again; or basing everything on the impossible fantasy of perfect competition, which the authors go on to do all at once. These assumptions cannot be said to eliminate a variable or collection of variables; neither can it be said that, despite their unrealism, they display a remarkable consistency with the available evidence.

Even if we accept the premise that these assumptions are merely ‘simplifying,’ the fact remains that engineers or physicists would not be sent into the real world without friction in their models, because such models would be useless– in fact, in my own experience, friction is introduced in the first semester. Jehle and Reny do go on to suggest that one should always adopt a critical eye toward their theories, but this is simply not enough for a textbook that calls itself ‘advanced.’ At this level such blatant unrealism should be a thing of the past, or just never have been used at all.

Economics is a young science, so it is natural that, in search of sure footing, people draw from the well respected, well grounded discipline of physics. However, not only do such analogies typically demonstrate a largely superficial understanding of physics, but since the subjects are different, analogies are often stretched so far that they fail. Analogies to other sciences can be useful to check one’s logic, or as illuminating parables. However, misguided appeals to and applications of other models are not sufficient to justify economist’s own approach, which, like other sciences (!), should stand or fall on its own merits.

You’re trying to say that Milton Friedman’s nobel prize (which isn’t really a nobel prize, since Alfred Nobel himself was a socialist and would be absolutely disgusted by the people who have won this Swedish Central Bank prize) isn’t as valuable as Röntgen’s nobel prize!?

Mankiw is certainly misleading. There is this magnetic moment of the electron and the theory – quantum electrodynamics correctly gives the answer to the eleventh place of decimal !!!

Yeah, I remember when I was learning fluid dynamics and the professor emphasised that perfect gas gave results accurate to 3/4 decimal places. There isn’t even an attempt to do something similar in economics. I’d even be willing to accept far bigger margins of error for economics, but alas, it’s all about learning the theory.

Related: Austrians like to talk about methodological dualism and the notion that the methodology of the natural sciences isn’t appropriate for economics. Mises kept this distinction throughout his life, I think. Hayek, influenced by Popper, instead abandoned this distinction in favor of one between simple and complex phenomena, noting that the same problems arise in the natural sciences (the difficulty of analyzing complex phenomena).

How does the frequent charge of “scientism” that I hear from Austrians relate to this?

Mises’s approach strikes me as quite peculiar — when made aware that many aspects of marginalist theory cannot be tested, he doubles down and says that NO economic doctrine should be even susceptible to empirical test; we should reject empirical evidence outright. Hayek strikes me as more reasonable and pragmatic, so I would like to understand his position more clearly.

The charge against “scientism” should be more broadly interpreted as criticizing using the mantle of science to argue that your theory is more scientific than another’s. Hayek and Mises were interested in showing that most of the time the people making this claim were not actually practicing science.

Hayek’s methodological position changed over time, but I think he was pretty close to Mises’ methodology. His article on knowledge was also a critique of Mises’ a priori approach, but later on Hayek claimed that as what we study becomes more complex it becomes more difficult to practice falsificationism. Mises considered Popper’s methodology to be a branch of positivism (if Hülsmann’s biography is right). While I disagree with this, I think Mises’ methodology really does the best job to highlight the difficulties of economic methodology, even if his positive contribution might not be entirely accurate or agreeable.

Yeah, I’ve learned from Jonathan that most of the Hayek and Mises interpretations you see on the web are selective at best and BS at worse. Mises thought theory should be derived a priori and then used as a tool to interpret data (similar to neoclassicism). He didn’t believe that his economics was unfalsifiable.

Your article has a lot to recommend it. My problem with it is the basic assumption that economics and science have some bonds. I see none. To me its like calling astrology a science. John K Galbraith put it succinctly when he said,”God invented economists to make astrologers look good”.

If you had to narrow down two of the most horribly misunderstood concepts in economics, would you say they would be: inflation and unemployment ?

The former with loads of faults in research and analysis due to the majority of history being based on a non-fiat money supply.

And the latter due to the fact that we have always had a system that benefits the plutocrats who don’t frankly care that much about unemployment so they sort of brush it aside with bad points like NAIRU?

Yeah, inflation is a strange one. I guess I should applaud economists for using the ‘best possible’ solution for calculating, say, the CPI, and generally being open about its flaws. Nevertheless, there are a lot of problems with the way it is used, for example the focus on CPI pre-crisis helped policymakers miss the bubble.

There’s no doubt that economics sits well with the ruling class. Economist’s attitude towards unemployment, price controls, taxes, and their general support for capitalism provides an intellectual framework which can be used by the wealthy and powerful to defend their wealth and power. Economists are actually centre-leftish but that generally gets lost in popularisations (and it’s worth noting that they are still more right wing than other social scientists, who often drift toward marxism or at least incorporate elements of it).

I really enjoyed this article. The problems with assumptions, idealisations, and abstractions in general in empirical inquiries seem to be one of the central issues in philosophy of science.
I’d like to take this advice from your short remarks: If someone devises an abstraction to come to grips with a real world phenomenon, ask yourself what gets lost in the abstraction and whether this proximum-abstraction behaves in the remaining coordinates like or at least close to the real thing.

Of course this soon gets tricky when there are abstractions of abstractions or models of models…

The crude defence “it’s just an abstraction” is used a lot by economists, but it’s not actually an argument because it can be used to defend any approach to science (which, incidentally, is the way I interpret Friedman’s incoherent essay).

Obviously no models are ‘true,’ but something like utility has just been shown to be false so many times that it should no longer exist.

First of all, I would in principle agree with your article. Yet, (since I had a similar discussion with a physicist once) he claimed that for example, Newtonian physics would work better on earth (in smaller scales that is) than quantum physics. However, the theory of relativity does its job better in the larger scale.

We, unfortunately, have lost the idea of the grander scale of things and specialize on the tiny sub-parts of the economy. That is the exact opposite of what Keynes or Adam Smith or even Friedman at some point (whom I do not really like) did. Economists have failed in a very specific issue: they have not been able to understand that although we can produce pretty mathematical equations and equilibria, the world does not function like that; we are not abstract mathematical ideas neither specific probability distributions. Physicists have the Heisenberg principle what do we have? Nothing whatsoever.

What annoys me even more is, as you have said, our persistence in models or theory which do not explain anything. It is as Warren Buffet has said: Ship captains go around the world but the flat earth society will always exist.

We focus in the “long run” and the “reaching equilibrium” as if the short- or medium-run do not matter. It appears that we believe that the long run will magically come from the sky and not as a combination of both the SR and the MR.

To sum up the above, Keynes has put it better than all: The long run is a misleading guide to current affairs. In the long run we are all dead.

Besides it was Max Plank himself who thought that economics was a much more difficult subject than physics. And surely not because of the mathematics!

We, unfortunately, have lost the idea of the grander scale of things and specialize on the tiny sub-parts of the economy.

This is a major criticism of the DSGE approach. You will find a DSGE model for everything: oligopoly, information asymmetry, financial crises, behavioural biases, and so forth. What you will not find is a ‘general’ macroeconomic framework that produces regular cycles due to its underlying mechanics – instead, the underlying tendency of the economy is for markets to clear, whilst pesky ‘frictions’ that can be added here and there prevent this. There are no unifying principles, and, what’s worse, there doesn’t seem to be an attempt to find them.

Exactly. The point is that we can explain little things, yet we miss the woods in order to see the tree. What is worse is that we are forced to rely on semi-working (or even not working) theories for the very irrational reason that we do not have any alternatives. It is as Taleb stated “if you do not have the map of airport A would you settle for the map of airport B when landing?”

You are right in stating that this sort of critique holds for DSGE models. Yet, I have seldom seen any other type of models. It is the same as the theories were are adhering to: we have to better alternative and instead of trying to build one we just repeat something which we know (but won’t admit) is wrong. (you may suggest models with heterogeneity but still I do not consider them that different from DSGE ones. Still, its an improvement)

We may also have to blame our persistence in using mathematics and only mathematics to explain the world. We know, since have seen in practice, that mathematical models fail yet what we do is create more complexity which assists us in nothing.

I have seen your FAQ and I quite agree with what you say. The issue is that there are theories that cannot be debunked easily and we have to try more.

P.S. I do not really agree with the Lucas Critique but I obviously cannot refute it…

It is as Taleb stated “if you do not have the map of airport A would you settle for the map of airport B when landing?”

Yeah, this is how I feel when economists say ‘what is your alternative?’ It’s such a silly defense.

(you may suggest models with heterogeneity but still I do not consider them that different from DSGE ones. Still, its an improvement)

Many DSGE models have heterogeneity. My main problem with DSGE is the market clearing and optimising agents with unchanging preferences, as well as the way DSGE can be adapted to explain anything in a given model, but that there are no models which explain multiple macroeconomic phenomena.

P.S. I do not really agree with the Lucas Critique but I obviously cannot refute it…

I think the crucial thrust of it is correct: policy and the economy interact and we must be wary of implementing policies without considering this. Obviously the way it has been interpreted just makes no sense.

Good post. The use of analogy can be a powerful thinking tool to help identify patterns in natural and man-made systems. For example, when Newton drew an analogy between a falling apple and the movement of the moon, he was doing something pretty smart. On the other hand, if I were to draw an analogy between Roger Federer’s tennis skills and my own then we would be in the realm of deluded fantasy.

There are two problems with the use of analogy in economics. The first is, as you say, that a generic analogy between economics and physics is a deluded fantasy. However, it is the second that is more interesting to me. Non-economists often use analogy when trying to understand economics and these analogies tend to show economics in a bad light. However, economists don’t listen to non-economists so the concerns raised by these analogies are never answered or even acknowledged. Here are four examples.

1. Economics versus car mechanics: The study of most systems starts with a description of the system. This precedes any diagnosis of problems or prescription of solutions. The description usually includes a standard diagram showing the main components of the system and their interactions. The description establishes a common vocabulary and enables effective communication between experts, but also helps establish trust between experts and the general public. Why is there no standard description of the component parts of the macro-economy and their interactions? Why are there no standard diagrams of the macro-economy? Why do macro-economists think that they can prescribe solutions to economic problems without first agreeing a description of the economic system?

2. Economics versus medicine: Both subjects involve interventions which have the capability of doing great good or great harm to many people. In recognition of that, medical doctors have a clear code of ethics with suitable punishments for contravention of the code. Economists, however, do not have any such code even though economists often accuse each other of being unethical. Why is there no code of ethics for economists?

3. Economics versus astronomy/business management: When Galileo looked at Jupiter he saw moons orbiting the planet. This changed the whole way we look at the world. The reason he could do this is that he used a tool which enabled him to look at Jupiter in more detail than earlier astronomers. The same is true in business when senior managers use IT tools to drill down into the detail of the management data in their systems in order to find the root cause behind a high level symptom such as lower sales. I would expect the inability to drill down into macro-economic data to be a major inhibitor to effective macroeconomics and I would expect this to be a major issue discussed in economics blogs. However, topics such as data quality, granularity and consistency are rarely mentioned. Why do economists show little interest in improving the quality of their source data when it is evident that this would improve their ability to diagnose and solve problems?

4. Economics versus meteorology: Both subjects involve forecasting the future. However, weather forecasters are trusted more than economic forecasters. Weather forecasters have educated the public on the limitations of their forecasts e.g. their daily forecasts are reliable but their long-range forecast are less so. As a result, we know how to use each forecast. Economists, on the other hand, have made no such explanation. Indeed, there seems to be no agreement in the economics profession on the value of forecasts. Some economists even seem to argue that economic forecasting should not be part of economics. What value should the general public place on economic forecasts?

In the absence of answers to this type of analogy-driven question, or even acknowledgement of the existence of this type of question by most economists, the rest of us are likely to conclude that the best scientific analogy for economics is alchemy.

1. I guess there’s the circular flow diagram, but unfortunately models don’t really build on this. It seems to me an accurate framework would be one that had workers, capitalists, bankers and the government as the primary agents at work. You might see this in an introduction but after that it’s onto representative agents and IS/LM.

2. Yeah, definitely. The has been a lot of talk about a code of ethics for economists. Economists assert their subject is ‘value free,’ but they don’t seem to realise that studying things from such a cold, calculating viewpoint is itself a normative decision which carries with it a number of value judgments and implications.

3. Maybe you’re off the mark here. I see this paper linked a lot by economists who think econometrics has improved recently. I think it addresses some of your concerns.

4. Yeah. The other problem here is that we have a degree control over the economy, but none over the weather.

There is a deeply rooted reason explaining the lack of scientific foundations in economics.

In Zen’s tradition, some patriarch is known to have said (rather prophetically, as may be argued) that one of the formers of Zen’s disciplines meant to vanish is that one dealing with “the Zen of ears” (related, naturally, to audition/hearing…and so on).

Why (the hell) am I talking about that here?

Because it may also be argued (philosophically, so to speak…and indeed Philosophy is the right field to do so…miles away from the so-called Political Science) that, speaking in terms of world-wide phenomena, contemporary mankind is not meant to stay away from anarchy (broadly speaking: that is, a state of affairs not lacking of formally constituted governments, yet pretty unpredictable in the end, and so on…). Quite curiously or peculiarly, such an anarchy-like state of affairs seems to be rather close to the one depicted (either explicitly or not) within the Austrian-school…

So it seems to be like this: to each depiction of mankind (or mankind essence) there corresponds one of either state of world-wide political affairs; one driven towards anarchy and the other towards an ordered state of society.

Then, take macroeconomics. Suppose that a satisfactory positive macro-theory capable of explaining the core of world economy dynamics in a given time-interval might be constructed upon Leijonhufvud`s inquiries of monetary economics (inquiries that he, cleverly, linked with practically all of the traditionally taught macro-schools, like monetarism, Keynesianism, central-banking regimes as starting points of short-run dynamics in general, and so on…)

It would be clear that such an instructively positive macro-theory could reasonably explain the edges at work of contemporary economies` dynamics (either equilibrating or disequilibrating economies, socially sound or unsound ones…and so on).

At the same time, such an accuracy in macro-dynamic depictions, either concerning disrupting economic systems or not, does not erase such a thing as a normative principle to set as to preclude, say, the blowing of a contemporary profile of society (take the one quite harmed by the sub-prime crisis, not to mention the possibility of the Euro-zone to broke into pieces…)

In such a case, the scientific approach to macroeconomics would only lend the foundations to catch the dynamics of a social-system that might be quite well meant to end.

In the current state of economics, not only there is a lack of an approach towards the drivers of mankind getting closer to social chaos (Why), but there is still a lack of a sound theory capable of making sense when depicting dynamics (How). Also, not only economists have rather poor knowledge of math, but there remains a growing ignorance of the foundations of a (finite) set of macro-dynamics where a satisfactory math-knowledge ought to be applied (if by some reason, the use of math as a language could yield some profit…say, a rather modest one).

I thought a lot about methodological issues as a student. Ideed, I still do. I was lucky enough to have a supervisor to at least look at Poper, Kuhn, Lakatos (thanks Max !) and touch upon the more specific economic literature. Also Friedman’s Essay on positive Economics (one of the most sneaky and misleading things he ever wrote, imho).

Nowadays, I think I would just suggest people read Jon Elster’s excellent little book “Nuts and Bolts for the Social Sciences”. The first essay, on social science as the study of mechanisms, is as good a statement of what economists should be trying to do as anything. Then again, pretty much anything Elster writes is worth reading.

By the way, I don’t comment much here (work work work), but I’m impressed by your posts.

Also Friedman’s Essay on positive Economics (one of the most sneaky and misleading things he ever wrote, imho).

Yeah, it’s utterly incoherent and was simply written to defend against early evidence that the neoclassical theory of the firm was incorrect. However, such distortions were common for Friedman – if you haven’t yet read it, you might enjoy this.

Interesting post. It reminds me of a half-baked analogy I’m still working on.
A lot of problems occur because economists have taken on the wrong role.

Economists think they are physicists, studying fundamental laws of science.
In fact, they are car engineers, like the Toyota ones from the 1930s. In studying a system (a GM or a Ford) they are reverse engineering a built thing. Underneath that built thing are some principles of physics – but mostly they are studying the design decisions, which are just that, engineering tradeoffs/design decisions.

The second key misunderstanding is that economists think they are trying to identify a platonic ideal of a moving vehicle, whereas what we need them to do right now is identify practical ways to make our economy more reliable/efficient/high performing etc.

I remember reading a neoclassical ideologue compare the law of gravity to the “law of utility maximizing” adding that “if I drop a pen, it will always fall down to the ground; similarly, if we introduce rent-control, homelessness will go up, not as instantaneously, but just as surely”. This is really how a lot of them think.

There is a passage (some paragraph) in the Treatise on Money of Keynes, where he complains (quite straightforward … and in a rather satirically) about Cournot stating an analogy between economics and Physics (or astronomy … i don`t remember precisely now). It is worthwhile to read it, indeed!! It is embedded in a chapter named “The diffusion of price levels”…